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CalPERS to oblige external public markets managers to divest $550m in tobacco stocks in surprise move

Decision comes despite research showing $3bn net loss since initial divestment was made.

CalPERS, the $303bn pension fund for Californian public employees, will sell off its remaining $550m in tobacco stocks by instructing its external managers to divest in a surprise move after research from Wilshire, its investment consultant, showed the fund missed out on $3bn in returns since implementing its initial ban for internal assets back in 2000.
CalPERS’ investment committee voted by 9-3 to remain divested from tobacco companies and extend the ban to its third party investments in public equities and bonds. The ban also covers the assets of its Affiliate Funds, which include the Judges’ Retirement System Fund, the Judges’ Retirement System II Fund, the Legislators’ Retirement System Fund, the Public Employees’ Health Care Fund, Supplemental Income Plans, the Public Employees’ Long-Term Care Fund, and the California Employers’ Retiree Benefit Trust Fund. CalPERS said the decision was taken after a comprehensive review of its existing tobacco investment restrictions, a review of their impact, extensive stakeholder outreach and reports from industry experts; an economic study which is estimated to have cost the fund $500,000. At the turn of the century, California’s two state pension giants, CalPERS and the California State Teachers’ Retirement System (CalSTRS) voted to dump about $800m invested between them in the tobacco industry because of concerns of ongoing litigation and regulatory risks facing the industry.CalSTRS completely divested tobacco in 2009 and has not reconsidered the decision.
However, at the start of this year, a committee of all 13 of CalPERS’ board members voted narrowly to approve a staff proposal to review its tobacco investments.
That came after a 2015 report by Wilshire concluded it had missed out on up to $3 billion in net investment gains between 2000 and the end of 2014 by not investing in tobacco shares.
Henry Jones, Chair of the CalPERS Investment Committee, said: “There is no doubt that divestment as an investment strategy presents challenges. However, after careful consideration of all the benefits and risks, the Committee has decided not only to maintain our current policy regarding tobacco divestment, but to extend the restrictions.”
Ted Eliopoulos, CalPERS’ chief investment officer, said: “We appreciate the Committee’s willingness to review this sensitive topic. We understand their concerns and will maintain the current tobacco exclusions while working to extend the tobacco divestment to our external portfolios.”
CalPERS said its investment staff will study the appropriate timing and implementation of the remaining tobacco shares sales by its external managers.